Li Feng Column | The Essence of New Retail, in 10 Characters
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Column No. 8: Let's talk about the essence and future of new retail.
"Same products, same quality, same price online and offline" — this didn't exist in China ten years ago. In recent years, the rapid development of e-commerce, full competition in offline commerce, and the integration of retail channels have made this possible for the first time in China. Starting in 2017, everyone began talking about new retail. What does new retail actually mean in China?
In this piece, I'll break it down into three questions:
- What changes have happened in China's retail environment in recent years?
- What factors have enabled new retail in China today? Why hasn't there been new retail in the US?
- What opportunities has China's new retail created, who benefits, and who gets eliminated?
Feel free to share your thoughts at the end. Before we begin, a quick note: we're hiring for those interested in consumer market investing — send resumes to hr@freesvc.com; we also look forward to continuing to learn from entrepreneurs in the new retail space, so send your pitch decks to bp@freesvc.com.
▍All new retail should have the same-product-same-price characteristic
What's "new" about new retail, which has been so popular these past two years?
In my view, China's retail industry has achieved, for the first time in history, "same products, same quality, same price online and offline." Anything with this characteristic is basically new retail. Or conversely, all new retail companies basically have this characteristic.
It sounds simple: whether you're in downtown Shanghai or a small town in Dongguan, whether you live in Beijing's CBD or outside the Fifth Ring Road, you can buy the same things at the same prices. A bag of Three Squirrels pecans — you can buy it at a Three Squirrels feeding store in Wuhu, Anhui, or through a link forwarded by a friend on WeChat. Same quality, same price.
Using these ten characters — same products, same quality, same price online and offline — as our standard, Freshippo, Xiaomi Youpin, NetEase Yanxuan, and MINISO are all typical new retail companies. They all have online and offline channels, and have achieved same-product-same-price across both.
One benefit of this is that consumer behavior becomes rational: buy online when it makes sense to buy online, buy offline when it makes sense to buy offline.
Because when you're confident that for the same brand's products, whether through online or offline channels, you're getting same-quality, same-price, high-value products, you won't obsess over channels anymore — you'll just do what's convenient.
One piece of evidence: if you look at Tmall Double 11 data over the years, in categories like women's clothing and beauty, the top rankings in early years were almost entirely occupied by "Taobao brands" like Inman, Hstyle, and Afu Essential Oil; but in the last two years, first place has gone back to Uniqlo, Pechoin, and other so-called "traditional brands" that developed offline — and there are more "traditional brands" in the Top 10.
▍"Online to online, offline to offline" — why wasn't this achieved in the previous ten years?
The fundamental reason China has become the exemplar of new retail is that the foundation of "old" retail was too weak.
In China, retail environment maturity has always been low. A real retail environment only began emerging after commercial real estate development in the 1990s. If we factor in consumption capacity, consumer culture, and market policy, China's retail environment roughly began around 2000.
In other words, before China's e-commerce industry took off, offline retail had only about ten years of rapid development.
In the 2000–2010 period, China's retail channels didn't achieve coverage or下沉.
Commercial real estate in that era didn't worry about tenants, and China's offline retail became distorted during this period — to bear the high rents of commercial real estate, stores had to find ways to add high markups; meanwhile, lacking chain channels, brands couldn't reach lower-tier cities, so in malls in second- and third-tier cities you'd see many brands from who-knows-where selling clothes for two or three thousand yuan.
This meant we couldn't buy good things offline, or even when we could, the prices were unreasonable. The smaller the place, the more absurd this phenomenon became.
Starting in 2008, e-commerce rapidly普及, providing Chinese consumers with category-rich, high-value products for the first time. E-commerce therefore achieved超速发展 in China. In five to six years, China's e-commerce penetration far exceeded US levels over twenty years.
During this period, it became a new phenomenon for consumers to scan product codes offline, then search and compare prices online before purchasing. Because for the same products, you could find cheaper identical versions online. In mid-2014, Alibaba even officially launched its "Code Shopping" strategy,一度被视为对线下商超宣战.
This kind of online-offline割裂 retail environment doesn't exist in the US.
First, before online retail emerged, the foundation of US offline retail was already solid. In a remote small place in Iowa, you could basically buy the same things at the same quality and price as in New York.
This is because US offline retail had developed for a long time, through full development and competition, with efficiency continuously improving and brand competition reaching a relatively optimal state.
Take Walmart as an example. In 1970s America, the middle class was rising, consumer society was arriving, and car culture and suburban culture provided new development space for retail. Before the e-commerce era arrived, department stores like Walmart, Macy's, and Target had already expanded and evolved for decades. This was a fully competitive, fully渗透, fully covered offline retail environment.
However, due to the characteristics of US urban structure and living environment — urban suburbanization and dispersed living — it wasn't convenient for consumers to go out and buy things, requiring twenty to thirty minutes of driving.
Therefore, US e-commerce platforms like Amazon provide circulation efficiency. They solve the problem of "going out to buy things is troublesome." Their online and offline offerings have always been the same products, same quality, same price. However, China's e-commerce and today's new retail still solve the core problem of "being able to buy good things."
▍What factors enabled new retail?
There are already many answers to this question. I summarize them as four points: full development of e-commerce, restructuring of commercial real estate patterns, popularization of consumption concepts, and accumulation of supply chains.
I won't go into detail about the development of China's e-commerce industry. What's worth noting is that e-commerce, having developed to today, has begun to倒逼 offline.
As more and more shopping malls open (according to the "Circulation Blue Book: China Commercial Development Report (2016–2017)" published by the Chinese Academy of Social Sciences' National Academy of Economic Strategy, as of September 5, 2016, China had nearly 4,000 shopping malls; by 2025, this number will climb to 10,000), and as online shopping's share grows higher, offline retail began facing enormous pressure.
It began adjusting direction, searching for new growth points. From a phenomena perspective, new commercial real estate leasing has been bringing in retail companies like Freshippo, Xiaomi Home, and Yonghui Super Species.
Additionally, brands like Three Squirrels that emerged from e-commerce channels have in recent years also begun laying out offline, opening physical stores in street-facing shopping malls in cities. This is certainly not regression. Everything they sell offline has the same value-for-money as what they sell online. What offline stores can solve are experience problems that virtual spaces cannot — like not being able to touch products, or having too many SKUs and not knowing what to buy.
The path to online-offline unification is transformation of sales channels.
Looking at entrepreneurial hotspots from recent years, B2B companies like Zhongshang Huimin have improved product coverage and渗透 efficiency at the circulation环节; social e-commerce and content communities have given consumers ways to know what good products are, and acceptance of "being able to buy good things" has grown increasingly high.
Another very important thing is that challenges faced by China's foreign trade after 2010, particularly after the financial crisis, meant that years of accumulated consumer goods production capacity and supply chain capacity urgently needed to find better outlets.
At this new retail节点, these emerging channels have helped large quantities of good products rapidly渗透 and cover both online and offline — this is the first time this has happened at such scale in China.
China itself is a massive consumer market. Same-product-same-price online and offline filled the market blank that originally existed offline, and also helped online retail add physical purchase scenarios and face-to-face decision-making opportunities. Once these two get stirred together, China's retail development speed will be much faster than America's.
▍Whose opportunity? Who will gradually exit the historical stage?
In this cycle, new consumer culture, new consumption channels, and new retail environments are simultaneously at play — some new brands will be able to emerge. As VCs, we've been actively挖掘 investment opportunities here.
From another perspective: the first deep integration of offline and online channels — what does this mean for entrepreneurs?
First, this may be the first time in Chinese history that if you make a truly good product, and happen to have the ability to control both online and offline channels, you can sell that product through all channels to the maximum number of people.
In other words, in the first stage of new retail, making good products definitely has a big出路. Opportunities come from channel unification. Channel integration leads to what were originally distinct channels becoming homogenized; startups compete in these homogenized channels, and "good things" can emerge.
Looking further ahead, "same products, same quality, same price online and offline" truly allows retail to form a complete data闭环 across the entire chain.
In the new retail era, brands can fully understand: who is buying my product, when are they buying my product, what's the repurchase rate... This data enables brands to react quickly, promptly improving sales strategies and adjusting products.
Previously, this data chain only existed online. Offline, between brands and users stood N levels of distributors and wholesalers — there was simply no way to obtain end-user behavior data. Now that brands are operating their own offline channels, with online and offline打通, once the data闭环 forms, the impact is enormous.
Here's a somewhat old but analogous example. In the late 1980s, manufacturers and chain retailers were still in fierce对抗, even hostile states. Procter & Gamble and Walmart did something that was not easy at the time but later proved correct and became a trend: P&G developed a "continuous replenishment system," which Walmart adopted. Thus, P&G products' inventory and sales information across thousands of Walmart stores worldwide was synchronized to P&G's system.
The result: Walmart and P&G's response speed to customer demand improved dramatically, and both sides obtained丰厚收益. Citing Bain & Company data, in 2004, 8% of P&G's $51.4 billion in sales came from Walmart; on the other hand, 3.5% of Walmart's $256 billion in sales was attributable to P&G.
A thinking question: When brands operate their own offline channels, making store operations their own business, whose market are they taking, and who gets eliminated?
The formation of data闭环 improves brands' reaction speed and efficiency, but also poses challenges to brands' supply chain capabilities.
When brands have the possibility of rapid adjustment, they need supply chain circulation speed to be high, reaction speed to be fast, and to have a certain柔性 foundation. If front-end changes come fast and data feedback comes fast, but the back-end supply chain can't keep up, this also threatens enterprise survival.
This is of course also an opportunity in the supply chain space. Actually, good brands across various industries including retail can basically find room for improvement in their supply chains. To put it absolutely: good brands 100% contribute to their supply chains; Apple is a典型 example.
In China's new retail environment, there are also many entrepreneurial opportunities in the supply chain direction. For example, our portfolio company Xinliangji, a餐饮供应链 brand, uses modern factories to complete food processing and preparation, seasoning packets and other condiment production, then distributes to restaurants through "self-owned cold chain delivery system + third-party logistics platforms" — restaurants can directly reheat and sell to consumers, and consumers can also purchase directly online.
Later, we'll use a separate article to discuss our终局猜想 for China's retail supply chain.
Summary
1 The essence of new retail is "same products, same quality, same price online and offline." All companies that get this right are those that can achieve "same products, same quality, same price online and offline" or embrace this change.
2 New retail means that when online and offline channels begin to integrate, and brands begin competing in homogenized channels, those that can make truly good products have a way forward. With good products, if entrepreneurs have the ability to master both online and offline channels, they have the opportunity to achieve unprecedented coverage and渗透 of those good products. Although simultaneously playing both online and offline channels is not easy, it is an无比正确 thing to do.
3 In the new retail era, being able to react promptly based on the complete online-offline data闭环, while also contributing to the supply chain, is an indispensable core capability for brands.
Today's Question
Q When brands operate their own offline channels, making store operations their own business, whose market are they taking, and who gets eliminated? In the real business world, have you seen such cases?
Feel free to leave a comment at the end sharing your views and opinions.
Again, we look forward to learning from entrepreneurs in the new retail space; and we welcome those interested in consumer market investing to join us — send resumes to hr@freesvc.com.
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